Oil Outlook for May 5-9

Oil price (WTI and Brent) declined during last week. WTI slipped by 0.8% and Brent oil by 0.9%. As a result, the gap of Brent oil over WTI didn’t change much: The premium ranged between $7.28 and $8.83. Last week, the EIA’s weekly updated presented another rise in oil’s stockpiles of 6.9 million barrels. Will oil further fall? This week, several reports may affect oil prices. These items include: U.S JOLTS, China’s manufacturing PMI, and EIA oil weekly report.

Here is a weekly outlook for the oil market for May 5th – May 9th:

Oil Prices – May Overview

During last week, crude oil price (WTI) slipped by 0.8% and reached by Friday $99.76/b; moreover, Brent oil declined by 0.9% to reach $108.59/b;

In the chart below are the daily shifts in WTI and Brent oil prices during the past several months (prices are normalized to December 31st, 2013). As you can see, WTI oil had a downward trend in recent weeks.

oil forecast Brent and WTI May 4  2014Premium of Brent over WTI – May

The gap between Brent and WTI oilslightly contracted last week as it ranged between $7.28 and $8.83 per barrel. During the week, the premium decreased by $0.15 per barrel.

Difference between Brent and WTI May 4  2014Oil Stockpiles, Demand and Supply

The oil stockpiles increased again by 6.9 MB and reached 1,770.5 million barrels. The linear correlation between the shifts in stockpiles has remained around -0.201: this correlation suggests that oil price, assuming all things equal, may further decline next week. But in order to better analyze the fundamentals let’s consider the changes in supply and demand:

Supply: Oil imports rose by 2.2% during last week. Moreover, oil production increased again by 0.5%; the total supply increased by 1.3%;

Demand: Refinery inputs also rose by 1% last week. In total, the demand remained below the supply, and the difference between supply and demand widened. This recent development may drag further down oil prices as the U.S oil market has become slightly looser than it was a week back. After all, the linear correlation between the weekly price of oil lagged by on period and the changes in the gap between supply and demand is mid-strong and negative at -0.276.

The chart below presents the changes in the difference between supply and demand and the price of oil.

oil market tight loose oil price  May 4If U.S oil market continues to loosen, this could push down oil price.    

The next weekly report will be released on Wednesday, May 7th and will refer to the week ending on May 2nd.

Oil Related News for the Week

Here are several news items that could affect the direction of oil prices:

Monday – China Manufacturing PMI (HSBC’s final estimate): This is HSBC’s last estimate of its April’s PMI index. Last month’s Manufacturing PMI reached 48 – i.e. China’s manufacturing sectors are contacting at a faster pace than in the preceding month. If the updated PMI index drops again, this will suggest China’s manufacturing conditions aren’t improving;

Friday – U.S JOLTS Job Openings: The Bureau of Labor Statistics will release its monthly update on the U.S number of job openings during April, excluding the farming industry; in the past report regarding March, the number of jobs opening was 4.17 million;

Oil Outlook and Breakdown

From the supply side, the rise in imports and production is likely to further cool down the oil market. From the demand side, refinery inputs increased again but at a slower pace. In total, the supply remained above the demand and the gap between the two widened. Moreover, the storage increased again. This could suggest the oil market is still looser. Looking forward, the upcoming U.S JOLTS report, and China’s manufacturing PMI could offer some input regarding the progress of these two world’s leading oil consumers. If these reports don’t meet the market expectations, they could pressure down the price of oil. The difference between Brent and WTI remained between $7 and $9 and is likely to remain at this range.

The bottom line, on a weekly scale, oil might keep falling.   

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